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Have An Adjustable Rate Mortgage? Then You Need To Know About LIBOR

Peter Tchir
Contributor
Opinions expressed by Forbes Contributors are their own.
Macro strategy, with a fixed income and derivative bias.
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This article is more than 7 years old.

The decision to finance some or all of you home is usually a trade-off between lower rates today at the risk of higher rates in the future.

Until December 2015, when the Fed raised rates for the first time (and so far, only time) that decision has been a good one.  Recently, LIBOR has started to rise for a variety of reasons you can read about here, and that has had two important effects that you should consider if you have a LIBOR based Adjustable Rate Mortgage (ARM)

  • You could consider trying to convert to a Fed Funds based loan or a Prime based loan as neither rate has moved up this year, while LIBOR has been rising (which I think is a persistent change due to how LIBOR is being calculated).

PRIME vs Fed Funds Effective vs 12 Month LIBOR (source Bloomberg)

  • You could consider moving out of a LIBOR based ARM into a Fixed Rate Mortgage as the differential between a 10/1 Year Arm and 1 Year LIBOR is the lowest it has been in over 7 years

Each person who has borrowed money will have to justify the costs of re-financing along with the risk that this is just a potential blip in LIBOR relative to other rates or whether fixed rates will continue to come down further, once again rewarding delaying, when deciding what to do about Rising Libor.

That said, I think if you have a LIBOR based loan, the first thing to examine is what the cost would be to switching to one based on Fed Funds or PRIME as it would reduce the risk of LIBOR drifting further away from those other rates.

To switch to a fixed rate loan is a bigger decision, but the decreasing differential suggests that it is worth thinking about, if not doing.

Disclaimer: The content provided is property of Peter Tchir and any views or opinions expressed herein are those solely of Peter Tchir. This information is for educational and/or entertainment purposes only, so use this information at your own risk. Peter Tchir is not a broker-dealer, legal advisor, tax advisor, accounting advisor or investment advisor of any kind, and does not recommend or advise on the suitability of any trade or investment, nor provide legal, tax or any other investment advice.

 

Peter Tchir
Peter Tchir